ITA Wealth Management

With the December statements available, I am updating the various portfolios I track and report on over on the Premium Content side of this blog.  For those portfolios where I have data older than three years I can account for risk, a measurement that is too often ignored by investors.  The Thomas/Lalla/Herr spreadsheet, used to calculate portfolio performance and compare it with a total stock market index, does not have the ability to calculate risk.  To come up with the risk factor, I maintain records using another software program.  For a few portfolios, I have detailed records going back into the 19990s, and one thing I observe is that I have been able to reduce portfolio risk from the 25% level to the 15% range by moving from individual stocks to index funds.  That is not a trivial decrease.

Many investors continue to populate their portfolios with individual stocks or managed mutual funds.  Big mistake.  Why invest in managed mutual funds when only 30% will outperform an index fund in a given year, and the following year that 30% will be a different group of managers?  One big reason is advertising.  The gullible public will follow CNBC recommendations rather than dig through research papers at their local university.  The popular press runs on advertising and it is not profitable to push index investing.

One of my favorite portfolio monitoring ratios is the Information Ratio.  I actually use the alternative of Alpha divided by Sigma, where the Sigma I use does not penalize volatility to the upside as we want a portfolio to move up.  Therefore, the standard deviation to the upside should not be a negative factor.

As I have been updating the seven portfolios, thus far all have positive Information Ratios.  This means the portfolio is performing better than the benchmark.  The higher the ratio the better.  When I see a ratio in excess of 0.5, I am very pleased.  On occasion, I have had a portfolio show up with a ratio greater than one.  That is exceptional.

When monitoring your portfolio, find some way to measure risk, the metric frequently neglected.  Also, know how well your portfolio is performing with respect to a benchmark.  The T/L/H spreadsheet does an excellent job of this, although it does take some work to learn how to use the Excel SS.

Lowell Herr

Photograph: January 4th snow

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Over on the Premium Content side of this blog, I provide analysis and information on several active portfolios.  One such portfolio is the Passive Portfolio (PP), in operation for eight years.  In the following “movie” you will see the ETFs used to populate this portfolio and the target percentages for each asset class.

When this portfolio was launched back on 11/30/2000, analytical tools were not available for the small investor.  At least none that I could afford.  With help from QPP, I now realize the PP is anything but a well diversified portfolio.  Even though the investments are spread all over the world, the diversification metric (DM) is only 9%.  We prefer to see this value over 40% and higher.

The analysis indicates the portfolio should outperform the S&P 500 by approximately 2% annually.  This is what has happened over the last eight years as the IRR for the PP is -0.6% while the VTSMX benchmark lagged at -2.6%.  Outperforming the S&P 500 by two percentage points over eight years is to be commended.  All the transaction details for PP are available on a SS if one is a Premium member.

How to increase diversification, increase projected return, and reduce projected risk is the work for a portfolio contractor.  That is what we are trying to design with the seven active portfolios.

Lowell Herr

Photograph:  Amsterdam, The Netherlands - typical canal scene

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One of several portfolio tracked over on the Premium Content side of the blog is one we title, Passive Portfolio or PP for short.  This portfolio has operated since December 2000.  As of November 28, 2008, PP dipped into negative territory for the first time as measured by month end statements.  The IRR was -0.23% while the VTSMX benchmark for the same period was -3.61%.  The past three months ripped up this portfolio.  The Return/Risk ratio was still a remarkable 0.73.  As you will recall, any value over zero is commendable.  The 0.73 value is an excellent number and is due to the portfolio outperforming the benchmark with relatively low risk.

The details of this portfolio are contained in the PP.xls spreadsheet available through links provided on the Premium side of the blog.  The portfolio is constructed using ETFs from Barclay.  When PP was first started, Vanguard did not offer ETFs.  Over time we picked up a few of Vanguard’s offerings, but the timing has been anything but stellar.

Lowell Herr

Photograph: Bratislava, Slovakia

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Later this morning I will be posting a new data table on the portfolio performances.  Since September 17th, when I last showed the performace data, nearly all of the seven portfolios improved in an absolute sense, and they also improved with respect to the VTSMX benchmark.  These are encouraging results in light of this bear market.

The data will be made available over on Premium Content in a few hours.

Lowell Herr

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The following information is normally published on Premium Content, but today I thought I would show the data for the seven portfolios under management.  In the last four portfolios, beginning with AA-Mosaic, the portfolios are young and still under construction.  Don’t pay much attention to the percentage figures as the IRR values are exaggerated due to the short time in existence.

The Passive Portfolio (PP) is coming up on its eighth birthday at the end of November.  This portfolio received an infusion of new cash and that has yet to be recorded.  Depending when that cash was inserted, the IRR value for the VTSMX benchmark will change.  I do have Risk data for this particular portfolio, and as you will recall, it is very low.  The Information Ratio for this portfolio is unusually high, a very good sign of a well managed portfolio.  The asset allocation percentages are available upon request over on Premium Content.

Colter is an older portfolio that went through the transition of moving to ETFs from an entirely stock portfolio.  Before this move, the portfolio was trailing the VTSMX benchmark.  Here is partial proof that index investments and asset allocation work to the advantage of the small investor.

The AEM portfolio, nearly two years old, is the one portfolio that is balanced between value and growth rather than tilting the assets toward the value side of the equity spectrum.  This portfolio also holds a small position in bonds.

The remaining four portfolios are all less than a year old.  Hence the exaggerated IRR values.  The one relative disappointment in the group is the Mosaic2 portfolio.  It is the only portfolio not outperforming its benchmark.  This portfolio has been hurt by the dip in international (developed) and emerging markets. It will take considerable care to get this portfolio performing at a level higher than its benchmark.

Looking at the infant portfolios, one can tell what a mess the market has been over the last ten months.

Portfolio Performance

Lowell Herr

Photograph: Celebrity Cruise Line logo

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